Reaching the Kyoto Targets, ACEEE

The carbon emissions reductions could increase substantially by 2020 as efficiency improvements continue to be made and more appliances, buildings, vehicles, and power plants are replaced. Specifically, we estimate that the five initiatives could lower carbon emissions in 2020 by around 603 MMT, 31 percent of projected emissions of 1,956 MMT that year in the ELA's Reference Case Forecast. By 2020, the five energy efficiency initiatives alone could return U.S. carbon emissions to nearly their level in 1990.

Table ES-1 also summarizes the estimated economic impacts of the five energy efficiency initiatives. Investments in efficiency measures through 2010 are estimated to cost $181

billion, but the net present value of energy cost savings over the lifetime of these measures is estimated to equal $344 billion (all values in 1996 dollars). Thus, energy bill savings exceed the costs of the measures by nearly a factor of two, resulting in a net economic benefit of around $163 billion.

The positive economic results in our study, and others like it, contradict the results of a number of "top-down" economic modeling studies that indicate reducing GHG emissions and/or achieving the Kyoto target will harm the U.S. economy. These studies contain unfavorable assumptions that lead to economic losses, such as no recycling of carbon tax revenue, no consideration of technological response, no-cost savings from energy efficiency improvements, no economic benefits from pollution abatement, and no international trading.

Our analysis shows that if we are intelligent about the policies and measures used to reduce GHG emissions, we can achieve substantial reductions with a net economic gain, not a penalty. Furthermore, our analysis is conservative in that it does not consider non-energy benefits (e.g., reduced damages from air pollution abatement or reduced vulnerability to oil price shocks from lower oil imports), the downward pressure on energy prices resulting from lowering energy demand, or potential capital cost reductions as markets for the energy efficiency measures grow.

In summary, the five initiatives presented in this report should play a central role in the U.S. strategy for achieving our Kyoto target and for making further GHG emissions reductions over the longer term. For a few of our recommended initiatives, partial efforts are underway or

Reaching the Kyoto Targets, ACEEE

proposed. This is the case for appliance efficiency standards and related voluntary programs, the federal public benefits trust fund, and the combined heat and power initiative. However, further actions are needed to fully implement these initiatives and achieve the maximum emissions and economic benefit. In the case of the vehicle fuel economy and power supply efficiency initiatives, little or no effort is being made at the present time to implement the policies we recommend. Action on vehicle fuel economy in particular is long overdue and is essential for achieving our GHG emissions reductions goals.

Table ES-1: Overall Carbon Emissions Reduction and Economic Impacts

Net Present Value of Costs and Savings for Measures Installed

during 1999-2010 (billion S)

Avoided Carbon
Emissions (MMT)

(1) The net present value of energy savings over the lifetime of energy efficiency measures

installed during 1999-2010.

Reaching the Kyoto Targets, ACEEE

INTRODUCTION

There is compelling evidence that emissions of carbon dioxide and other greenhouse gases (GHGs) are inducing climate change at an alarming rate and are therefore posing serious environmental, economic, and social risks. As President Clinton recently stated:

The World's leading climate scientists have concluded, unequivocally, that if we
don't reduce the emissions of greenhouse gases into the atmosphere all across the
Earth, then the temperature of the Earth will heat up, seas will rise and
increasingly severe floods and droughts will occur, disrupting life in low coastal
areas, disrupting agricultural production and causing other difficulties for the
generations of the 21st century (Clinton 1998).

Faced with this challenge, nations negotiated the Framework Convention on Climate Change in 1992 at the Rio Earth Summit. The convention, signed by President Bush, entered into force in March 1994 after ratification by 164 nations. The Convention includes a commitment by the United States and other industrialized countries to seek to reduce emissions of carbon dioxide and other GHGs to 1990 levels by 2000.

As further evidence of GHG-induced climate change and its potential impacts mounted during the 1990s, a Protocol to the Framework Convention was negotiated and completed at the Third Conference of Parties in Kyoto, Japan in December 1997. The Kyoto Protocol establishes legally binding GHG emissions limits for 38 industrialized countries starting in the 2008-2012 budget period. The United States agreed to a target for this initial budget period of 7 percent below the 1990 emissions levels. The Protocol also allows emissions trading between countries with binding limits, trading among the six gases covered under the Protocol, credit for emissions reduction projects carried out in developing countries, and credit for increasing carbon stocks ("sinks"). Thus, the United States could, in practice, meet its target without actually reducing its own emissions to 7 percent below their 1990 levels.

According to the U.S. Department of Energy (DOE), the United States emitted 1,753 million metric tons (MMT) of carbon or carbon equivalent in 1996, 8.3 percent more than the 1,618 MMT emitted in 1990 (ELA 1997a). These values include the six gases covered by the Kyoto protocol. Considering only carbon dioxide (which is responsible for about 85 percent of the total for these six gases), emissions increased by nearly 120 MMT (9 percent) between 1990 and 1996 (see Figure 1). And preliminary data show that emissions of carbon dioxide rose an additional 22 MMT (1.5 percent) in 1997 (Geller and Thorne 1998). Given the rise in emissions in the past eight years and current trends, the United States will have to take substantial action in order to meet its 2008-2012 target.

Voluntary initiatives undertaken since the Framework Convention was adopted are helping to restrain growth in GHG emissions. The Clinton Administration estimates that current efforts will reduce carbon emissions by about 32 MMT and emissions of all six gases by about 73 MMT

Reaching the Kyoto Targets, ACEEE

of carbon equivalent in 2000 (DOS 1997). But this is clearly not enough to meet either the Rio treaty target or the goal of the Kyoto Protocol. In fact the Energy Information Administration recently forecast that given current policies and trends, carbon emissions alone will reach 1,577 MMT in 2000, 1,803 MMT in 2010, and 1,956 MMT in 2020 (EIA 1997b). Compared to the 1,346 MMT emitted in 1990, DOE is projecting an increase of 17 percent by 2000, 34 percent by 2010, and 45 percent by 2020. The growth in emissions in the 1990s is attributed to robust economic growth, low energy prices, and limited funding of ongoing emissions mitigation efforts (ELA 1997a).

Figure 1: U.S. Carbon Emissions for Fossil Energy
Consumption, 1990-1997.

There is considerable controversy concerning the economic impacts of significantly reducing U.S. GHG emissions. "Top-down" economic modeling with worst-case assumptions indicates that stabilizing carbon emissions at the 1990 level could reduce GDP by 0-2.4 percent (Repetto and Austin 1997). The unfavorable assumptions that lead to loss of economic output in these studies include no recycling of carbon tax revenue, no consideration of technological responses, no-cost savings from energy efficiency improvements, no economic benefits from pollution abatement, and no international trading or joint implementation. Using more favorable assumptions would lead to more positive results. For example, Janet Yellen, Chair of the Council of Economic Advisers within the Clinton Administration, has testified that meeting the Kyoto target would have a very small negative impact on GDP (0.1 percent GDP loss in 2010) if the United States takes advantage of the flexibilities in the treaty (Yellen 1998).

But even the Yellen testimony ignores the economic benefits that could result from reducing GHG emissions; e.g., from reducing consumers' energy bills, stimulating capital investment, and avoiding damages from climate change and air pollution more broadly. Economic modeling as well as "bottom-up" engineering studies that consider efficient economic and technological responses and that account for the positive and negative economic impacts associated with

Reaching the Kyoto Targets, ACEEE

cutting GHG emissions conclude that substantial reductions are possible with a net economic gain (Energy Innovations 1997; Interlaboratory Working Group 1997; Laitner 1997b; Repetto and Austin 1997).

In this context, the Clinton Administration has proposed expanding U.S. efforts to reduce GHG emissions in an economically sound manner. In particular, the President has proposed a Climate Change Technology Initiative that includes $2.7 billion in additional R&D and deployment activities as well new tax incentives that are estimated to cost the Treasury $3.6 billion over five years (The White House 1998). The R&D and deployment activities are focused on increasing the availability and adoption of cost-effective energy efficiency and renewable energy measures. The tax incentives are focused on stimulating commercialization and sales of advanced energy efficiency and renewable energy technologies. The Administration also has proposed policies that would support implementation of energy efficiency and renewable energy technologies to some degree as part of its electric utility restructuring proposal. While these proposals are a step in the right direction, much more needs to be done to meet the Kyoto target and go beyond it in order to slow global warming over the long run.

The energy efficiency initiatives presented and analyzed in this report would help the United States achieve its Kyoto target with net economic benefits rather than costs. Our proposals build on ongoing efforts and the new initiatives recently proposed by the Clinton Administration. In some areas, we combine elements of the Administration's proposal with additional policies that are needed to overcome the full range of barriers inhibiting greater energy efficiency in the marketplace. In other areas, we recommend a combination of market incentives, regulatory reforms, and efficiency standards in order to transform energy use patterns and maximize the economic and environmental benefits.

Below we present five strategies that together could take us over 60 percent of the way towards meeting our Kyoto target (with respect to carbon emissions reductions). These policies would stimulate widespread energy efficiency improvements in all key sectors of the economy-buildings, transport, industry, and electricity supply. However, these policies do not exhaust the opportunities for emissions reductions through cost-effective efficiency improvements. Nor do they address the emissions reductions that are possible through greater use of renewable energy sources.

Methodology

For each strategy, we analyze potential energy savings, carbon emissions reductions, costs and energy bill savings for investments made during 2000-2020. Our analysis uses the Reference Case Forecast in the Annual Energy Outlook 1998 as a baseline projection (EIA 1997a). This is the most recent official energy supply and demand forecast by the U.S. Department of Energy. It assumes continuation of existing energy efficiency policies and programs, but no additional policies and programs. Our analyses try to exclude any efficiency improvements explicitly or implicitly included in this forecast.